The ‘good’ deflation: Natural gas prices at 7-year low

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More of the kind of deflation the economy needs: Natural gas prices fell to seven-year lows Tuesday.

Near-term futures prices in New York slid 7 cents, or 2.1%, to $3.10 per million British thermal units -- the ninth straight decline and the lowest price since Aug. 2002.

While crude oil prices have jumped 55% this year, to $69.19 a barrel as of Tuesday, natural gas has plunged 45%.

The gas price is down 77% from the 2 1/2-year high of $13.58 per million BTUs reached on July 3, 2008, amid the last gasp of the speculative frenzy for commodities early that summer.

The problem for gas producers -- and advantage for consumers -- is ballooning supply, as the recession has slashed industrial gas use.

From Bloomberg News:

Gas stockpiles rose 63 billion cubic feet in the week ended Aug. 7 to 3.152 trillion cubic feet, the Energy Department said. The inventory surplus to the five-year average was about 20%.

‘Brimming storage remains a problem,’ Michael Fitzpatrick, a vice president for energy at MF Global Ltd. in New York, said in a note to clients. ‘There are already over 3 trillion cubic feet in the ground, levels usually not seen until late September.’

Hurricane Bill, the first of the Atlantic season, and two other tropical disturbances have stayed away from energy-producing regions of the Gulf of Mexico, which pressured prices lower, Fitzpatrick said.

With ample storage, the hurricane hasn’t compelled investors to buy natural gas as a hedge against production disruptions, said Cameron Horwitz, an analyst at SunTrust Robinson Humphrey in Houston.

‘Not when you have storage at 600 billion cubic feet above last year,’ he said. ‘It will take a huge disturbance to get natural gas to take off. That’s a lot of gas to burn off.’

What’s more, as the Wall Street Journal points out, rising gas production in U.S. regions away from the Gulf of Mexico has become another depressant on prices.

From the Journal:

In recent years, when the Gulf represented a fifth of the U.S. gas production and markets were strained, any threat of storms could send prices soaring. But gas output from the Gulf now accounts for about 11% of domestic supply as producers have increasingly moved on shore to tap gas-rich formations known as shales, putting less supply in the path of storms and boosting overall output from these new fields.

-- Tom Petruno